The effects of climate change on the natural rate of interest: A critical survey

Francesco Paolo Mongelli, Wolfgang Pointner, Jan Willem van den End*

*Corresponding author for this work

Research output: Contribution to JournalReview articleAcademicpeer-review

Abstract

This survey reviews the literature about the possible impacts of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Prima facie, economic, and financial developments can lower r* in scenarios with increasing climate-related damages and uncertainty that reduce productivity growth and raise precautionary savings. Orderly climate policies have a pivotal role in facilitating the transition to a carbon-neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r* and summarize the outcomes. However, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Overall, the downward effects of climate change on r* can be substantial, even considering the high degree of uncertainty about the outcomes, with tipping points and nonlinear effects aggravating the economic impacts. The downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space. This article is categorized under: Climate Economics > Economics and Climate Change Assessing Impacts of Climate Change > Evaluating Future Impacts of Climate Change.

Original languageEnglish
Article numbere873
JournalWiley Interdisciplinary Reviews: Climate Change
Volume15
Issue number2
DOIs
Publication statusPublished - 2024

Bibliographical note

Publisher Copyright:
© 2023 The Authors. WIREs Climate Change published by Wiley Periodicals LLC.

Funding

The authors wish to thank Martin Admiraal and Sofia Gori for data assistance and Jesus Crespo Cuaresma, Livio Stracca, Oscar Arce, Magnus Jonsson, Warwick McKibbin, Ralph Setzer, Pinelopi Tsalaporta, Ariana Gilbert, two anonymous reviewers and participants to various seminars for useful comments. Views expressed are those of the authors and do not necessarily reflect the official positions of the European Central Bank, Oesterreichische National Bank, or De Nederlandsche Bank.

FundersFunder number
European Central Bank
Oesterreichische National Bank

    Keywords

    • climate change
    • interest rate
    • monetary policy
    • natural rate of interest
    • transition policy

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